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Eswar Prasad Says RBI’s Credibility Under Threat From Government Attacks

The scathing criticisms launched by Prime Minister Narendra Modi’s government towards the Reserve Bank of India may end up hurting the credibility of the central bank, according to economist Eswar Prasad.

“Central-bank independence is often fetishized nowadays,” Prasad wrote in an op-ed piece in Project Syndicate. “Nonetheless, the loss of operational independence—the ability to act without interference in pursuit of its stated objectives, developed in consultation with political authorities – can also be fatal to a central bank’s credibility.”

Prasad, who is the Tolani Senior Professor of Trade Policy at Cornell University, wrote that this is an “alarming” situation for India because the RBI’s effectiveness has contributed substantially to the country's economic growth.

This criticism is disingenuous at best. At worst, it could bring to a grinding halt much-needed banking-sector reforms aimed at, among other things, ensuring productive, rather than politically motivated, lending. Such an outcome would heighten financial risk and jeopardise the economy’s growth potential.

Eswar Prasad In Project Syndicate.

Prasad noted that the RBI’s commitment to price stability has translated to lower interest rates and kept the government's debt-financing check. The central bank has also curbed the fall in rupee and hence averted the “vicious circle of capital outflows and currency depreciation”.

Moreover, Prasad said, its monetary policy and supervisory authority have made the RBI one of India's “most potent tools” for a stable growth economy.

“With national elections approaching, India’s government cannot afford to sacrifice these benefits, especially at a time of rising skepticism about its ability to maintain fiscal discipline and implement difficult reforms,” Prasad wrote. “Modi and Jaitley need to recognise this and start speaking up for, not against, the RBI.”